Nvidia, because of explosive demand for AI, is trading at over 100 times earnings. It is priced on the assumption of a distant future where there is a continued and growing demand for AI products, and where they face little competition.
The thing is, Nvidia’s high gross margins are public knowledge. And they cannot produce enough chips. This gives fabs such as TSMC, Samsung, and possibly even Intel insane pricing power.
On top of all this, if a competitor happens to provide a viable alternative to Nvidia, it could put significant pressure on Nvidia’s margins and market share, but the fabs could continue to charge high prices per wafer.
TSMC is trading at a P/E of 25 and Samsung 35, which is high, but not too high for a growing company.
There’s a saying, “During a gold rush, sell shovels”. A lot of people may say that Nvidia’s AI chips are the shovels, but I’d argue the analogy leans more towards fabs like TSMC. A shovel still has some use after a gold rush ends, an AI chip has little use after an AI rush ends. But a fab always has chips to produce, whether they’re AI chips, or other purposes.
